Here is an excellent editorial sent to me from John Mauldin on how the ability of a government to print money gives them the power to renegotiate or write down it debt.  Don’t see it coming?  Keep you head in the sand!

Over the past 40 years, Rob Arnot of Research Affilites has managed to attract Nobel laureates and other real drivers of serious economic research on asset allocation – perhaps because he runs in those circles. He has won more (5!) Graham and Dodd Scroll Awards, given annually by the CFA Institute for best articles of the year, than anyone. As well as lots of other intellectual prizes that my more pedestrian work never seems to garner.

This year saw three Nobel laureates, multiple professors (Cal Tech, Princeton, etc.), and a few other heavyweights contribute to the event. Dr. Jason Hsu, the chief investment officer of Research Affiliates, always prepares a summary at the conclusion of the conference, and this year they published his rather thorough notes.

The overall theme that Jason came up with in summarizing the presentations is “The Risk of Government Policies and the Rationing of Retirement.” This is not what many  readers would expect from academic economists. A sample of what the attendees heard:

The ability to print money gives the government an ex post option to renegotiate (write down) its debt in real terms. If the government spending and/or investments prove wasteful or unwise, it can allocate the pain to bondholders by printing more money instead of facing the wrath of the electorate by raising taxes in a slumping economy. This option to renegotiate debt without legislative procedure enables irresponsible spending by the government, perpetually, or at least until rampant inflation ensues…The government’s willingness to borrow rather than tax is a statement about its ability to allocate pain. Higher taxation today allocates pain to wage earners now. Borrowing is a tax on future wage earners….

At the heart of the retirement challenge is the simple fact that we cannot store human capital. And slavery is not an option. Asian families have traditionally tried to work around that by keeping a stranglehold on their children (children are expected to care for their aging parents), but, given the widespread adoption of Western pop culture in Asia, that approach is not working as well now as it did in the past. Western societies have solved the problem of providing for old age by means of property rights; old folks who own the machines and the underlying intellectual property can force the young to share the fruits of their labor. While the boomers cannot own generations X and Y, they can own the tools they need to make a living!… The transition from the boomers to gen Xs and Ys in the workforce brings into focus the second fundamental conservation law in economics: how much we produce in the long run depends on how many people are working and how productive they are.